Question

Vextra Corporation is considering the purchase of new equipment costing $40,500. The projected annual cash inflow is $12,100, to be received at the end of each year. The machine has a useful life of 4 years and no salvage value. Vextra requires a 12% return on its investments. The present value of an annuity of $1 for different periods follows:
Periods 12%
1 0.8929
2 1.6901
3 2.4018
4 3.0373


What is the net present value of the machine?

$(36,751).

$(3,000).

$40,500.

$6,751.

$(3,749).

Answer 1

Answer:

Net present value = $3,749  

so correct option is $3,749

Explanation:

given data

Present value of cash outflow = $40,500

annual cash inflow = $12,100

useful life = 4 years

rate on return = 12 %

present value of an annuity = $1

to find out

net present value

solution

we know here Present value annuity factor @12% for 4 years is given as

Present value annuity factor @12% for 4 years  = 3.0373

so we get here Present value of cash inflow that is express as

Present value of cash inflow = Annual cash flow × Present value annuity    .........................1

put here value we get

Present value of cash inflow = $12,100 × 3.0373

Present value of cash inflow = $36,751

so now we get Net present value that is express as

Net present value =  Present value of cash outflow - Present value of cash inflow    .................2

put here value we get

Net present value = $40,500 - $36,751

Net present value = $3,749  

so correct option is $3,749